The going is good these days in the Irish economy. The latest growth surge caps a signal year but Conor O’Kelly, chief executive of the National Treasury Management Agency (NTMA), cautions that the State still has large debts to service. For all the progress made, there is no evading the legacy of crisis.
“My cautionary note around all this – that’s all very good news and everything – but sometimes what’s lost in that is that the size of the debt that’s outstanding is over €200 billion,” says O’Kelly. “It’s about €203 billion today, as we sit here. In 2007, it was €40 billion. The bond market as we deal with and manage it is five times the size.”
Small countries with elevated debt levels must always be careful, he says. Almost 12 months have passed since O’Kelly, a former stockbroker, took charge of the NTMA. The agency, a creature of the Haughey era, was established 25 years ago as a specialist funding and debt management body.
Its remit has widened appreciably. The latest addition is its stewardship of the €7.4 billion Strategic Investment Fund, a new body which has made significant investments this year in residential property financing, biosciences and the tech sector. “This year the target was to invest between €500 million and €1 billion. We are on target to hit the higher end of that range,” O’Kelly says.
The period since O’Kelly’s arrival has been marked by the refinancing of €18 billion in expensive International Monetary Fund loans, yielding €1.5 billion in interest savings over the lifetime of the replacement debt. The agency also sold the State’s first 30-year bond, some of which was issued at a super-low interest rate of 1.3 per cent.
It was hardly a hindrance that the European Central Bank had been buying sovereign bonds in its belated quantitative-easing programme, a crucial backstop for all euro zone member states which compresses their borrowing costs.
The interest rate on Irish 10-year debt this week was about 1 per cent. Having risen to 12 per cent at the height of crisis in 2011, the 10-year yield was as low as 0.751 per cent last March. The yield never eclipsed 6 per cent and never dropped below 3 per cent between the euro’s introduction in 1999 and the outbreak of the international crisis in 2007.
As a newcomer to the NTMA, O’Kelly accepts his timing was propitious. Strong growth has helped bring Ireland’s debt-to-GDP ratio under 100 per cent, unemployment is below 9 per cent and there’s a primary surplus in the public finances, which is a surplus before debt-servicing payments.
“We’ve issued at half the yield and double the maturity of 2014, so that’s an extraordinary improvement in the profile of the debt,” he says. “I’m tapping the ball in from in front of goal essentially and taking all the glory when obviously a lot of work has been done by the policymakers, my predecessor, the debt team, over a long period of time. You can’t just turn on the tap whenever you want to. They’ve been out on the road, they’ve had the shoe-leather, they’ve had the harder conversations.
“Investors have re-rated Ireland in 2015. It’s clear from research notes, conversations with investors and where we trade on spreads and how we trade day to day that we are now considered to be semi-core. We’re constantly now referring to Ireland in relation to spread over France, spread over Belgium – so trading about 20 basis points over France – rather than obviously only 12 months ago [when] we were out being talked about as a peripheral. We were in a different category with Spain and Italy and Portugal.”
He credits Minister for Finance Michael Noonan with “defining Ireland more by how we got out of this crisis than by how we got into it”. The public finances are improving steadily but the Government drew flak from economists for a €1.5 billion increase in supplementary spending this year. Do market investors share this concern?
“You’ve got to be realistic. This is the real world as well. I think people are practical about that as long as it’s not excessive. People understand that politicians have to look at elections and also people have to benefit,” says O’Kelly. “It’s not about bond investors and their wellbeing. Citizens have to see the benefit from the improvements in the economy. Pragmatic and sensible investors note that, see that.”
At this point 2015 is practically a wrap. So what is the outlook for 2016? Another big year is in prospect. Although the NTMA has an €8 billion bond to redeem next April, its funding requirements in 2016 will be smaller than this year. However the general election comes before that redemption, a key event for the State which remains hugely reliant on the goodwill of international money markets.
O’Kelly won’t comment on the timing of the 2016 bond issuance programme. He is is also silent on suggestions the agency might bolt from the traps early in January to tap the market before the election campaign – but what are investors saying about the situation and the outlook?
“They focus on a couple of questions, the key question is sustainability,” he says. “So they see the growth. They acknowledge the growth. There’s no doubt that it’s happening: some of the reasons why it’s happened are reasonably clear. But they say – in terms of the capacity of the economy to continue to grow – where’s it at in terms of the natural long-term growth rate?
“That’s where people have different interpretation, as to whether it’s going to come back to 2 per cent\, 3 per cent. Or is it 4 per cent, 5 per cent? Depending on your view of that, that’s a key variable in terms of whether you want to continue to buy Ireland.”
With the election imminent, the question of political stability also arises. He frames this around the stability of economic and fiscal policy. “People look at that, but I think in general that’s become less of a concern, for a couple of reasons. One is [that] there’s no anti-euro campaign or party of any significance in Ireland . . . As long as you’re a member of the euro zone and you’re signed up, there is quite a bit more fiscal discipline and that’s as a result of the crisis.”
There may be no anti-euro party but neither is there any denying the ascent of the anti-establishment political force. So is that coming up with investors?
“It’s not really. I think investors are very short term or can only look at the political dimension in terms of an investment, they can only isolate it as a variable for a very short period of time,” he says. “However, as you get very close, a few weeks away from an election – if indeed you’re of that view and you thought there was a possibility of some party making an impact on the election – I think you probably would make a bond market decision at that point.
“Politics and elections tend to come into bond market investors’ decision-making process for a very short window and you would have seen that in the UK at the last election.”
So is he braced for the possibility of volatility? “It’s an event you always have to be watchful for, but there’d have to be a big move in sentiment from where we are today. But that could happen, I don’t know . . . For the moment, it’s not a factor.”
Asked whether the market’s perception of these issues might have changed after the radical-left Syriza government in Greece accepted the terms of its international bailout, he says it “probably” did.
